Two MSU fraternities, Phi Kappa Sigma and Phi Kappa Tau, are accustomed to each having 6 parties a month. Phi Kappa Sigma and Phi Kappa Tau are located close to each other on Bogue Street. These parties impose a negative externality on their other neighbors on Bogue Street. Suppose President Stanley decides that the socially optimal total number of parties on Bogue Street is 8 parties a month. The total benefits each fraternity derives from having a certain number of parties a month are given in the table below. Number of Parties 0 1 2 3 4 5 6 Phi Kappa Sigma's Total Benefits 0 300 500 650 700 740 775 Phi Kappa Sigma's Marg. Benefits Phi Kappa Tau's Total Benefits 0 250 475 650 750 825 850 Phi Kappa Tau's Marg. Benefits a) Suppose President Stanley decides to limit the total number of parties to 8 by issuing Phi Kappa Sigma 6 rights and Phi Kappa Tau 2 rights. Each right allows the fraternity to have one party. If these rights are allowed to be traded, how many rights will be sold? Who will sell the rights and who will buy the rights? How much will these rights be sold for (identify possible range)? Explain your answers. b) Now suppose President Stanley limits the total number of parties to 8 by issuing Phi Kappa Sigma 4 rights and Phi Kappa Tau 4 rights. If these rights are allowed to be traded, how many rights will be sold? Who will sell the rights and who will buy the rights? How much will these rights be sold for (identify possible range)? Explain your answers. c) Explain why the benefit achieved is greater when the rights are allowed to be traded compared to when they are not allowed to be traded.
Two MSU fraternities, Phi Kappa Sigma and Phi Kappa Tau, are accustomed to each having 6 parties a month. Phi Kappa Sigma and Phi Kappa Tau are located close to each other on Bogue Street. These parties impose a negative externality on their other neighbors on Bogue Street. Suppose President Stanley decides that the socially optimal total number of parties on Bogue Street is 8 parties a month. The total benefits each fraternity derives from having a certain number of parties a month are given in the table below. Number of Parties 0 1 2 3 4 5 6 Phi Kappa Sigma's Total Benefits 0 300 500 650 700 740 775 Phi Kappa Sigma's Marg. Benefits Phi Kappa Tau's Total Benefits 0 250 475 650 750 825 850 Phi Kappa Tau's Marg. Benefits a) Suppose President Stanley decides to limit the total number of parties to 8 by issuing Phi Kappa Sigma 6 rights and Phi Kappa Tau 2 rights. Each right allows the fraternity to have one party. If these rights are allowed to be traded, how many rights will be sold? Who will sell the rights and who will buy the rights? How much will these rights be sold for (identify possible range)? Explain your answers. b) Now suppose President Stanley limits the total number of parties to 8 by issuing Phi Kappa Sigma 4 rights and Phi Kappa Tau 4 rights. If these rights are allowed to be traded, how many rights will be sold? Who will sell the rights and who will buy the rights? How much will these rights be sold for (identify possible range)? Explain your answers. c) Explain why the benefit achieved is greater when the rights are allowed to be traded compared to when they are not allowed to be traded.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Two MSU fraternities, Phi Kappa Sigma and Phi Kappa Tau, are accustomed to each having 6
parties a month. Phi Kappa Sigma and Phi Kappa Tau are located close to each other on Bogue
Street. These parties impose a negative externality on their other neighbors on Bogue Street.
Suppose President Stanley decides that the socially optimal total number of parties on Bogue Street is
8 parties a month. The total benefits each fraternity derives from having a certain number of parties a
month are given in the table below.
Number of Parties
0
1
2
3
4
5
6
Phi Kappa
Sigma's
Total Benefits
0
300
500
650
700
740
775
Phi Kappa
Sigma's
Marg. Benefits
Phi Kappa Tau's
Total Benefits
0
250
475
650
750
825
850
Phi Kappa Tau's
Marg. Benefits
a) Suppose President Stanley decides to limit the total number of parties to 8 by issuing Phi Kappa
Sigma 6 rights and Phi Kappa Tau 2 rights. Each right allows the fraternity to have one party. If
these rights are allowed to be traded, how many rights will be sold? Who will sell the rights and who
will buy the rights? How much will these rights be sold for (identify possible range)? Explain your
answers.
b) Now suppose President Stanley limits the total number of parties to 8 by issuing Phi Kappa Sigma
4 rights and Phi Kappa Tau 4 rights. If these rights are allowed to be traded, how many rights will be
sold? Who will sell the rights and who will buy the rights? How much will these rights be sold for
(identify possible range)? Explain your answers.
c) Explain why the benefit achieved is greater when the rights are allowed to be traded compared to
when they are not allowed to be traded.
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